Christopher Penney
Program Director of Entrepreneurship/Strategy
University of North Texas, G. Brint Ryan College of Business
Why do you think credit card companies offer sign-up bonuses to new customers?
There are fairly complicated metrics used to figure out profitability in any industry, but what it often boils down to is "bragging rights". I was pretty surprised to learn that profitability is not as high as you would expect for the average credit card issuer as it might be in other industries. But just like it is true for any business, shareholders want to see a return on investment. So, if you cannot really impress shareholders with strong profitability, then one of the metrics that "looks" the best to shareholders is the number of new accounts.
What advice do you have for someone shopping for a credit card with a big initial bonus?
If I am that person, I think step one is for that someone to figure out what type of bonus gives me the best value! If I travel a lot, I would value reward points with certain issuers much higher than I would straight cash. With some issuers, I can convert those points to airline miles or hotel points and stretch that initial bonus much farther than I could cash. On the other hand -- and I know this sounds counterintuitive -- suppose I had a small amount of debt that was costing me lots of money in fees each year due to ever-increasing interest rates. I might open up another credit card offering a big initial bonus that I could use that bonus to pay off the debt. I might also transfer in some of that debt where, depending on the offer, I might be able to reduce the interest rate to 0% for a few months.
One of the other counterintuitive things is that I may actually get more value by opening a second credit card with the same company as my first credit card. For example, American Express has been known to actively court their customers into opening a different card, and in some cases, the sign-up bonus offers are even better than someone could get if they do not have any cards with American Express.
How should the length of time a person plans to keep a credit card affect their perception of initial bonuses?
I think one of the really important things is to figure out how that credit card's normal bonus spending categories match my lifestyle. If I splurge on a very high annual fee credit card that gives a good bonus in the beginning but does not give me many bonuses beyond that for everyday spending, then I want to look at the other features of the card. If I do not travel a lot, I may ask "does that credit card offer me credit I can spend on a digital streaming service that I'm already paying for"? If I do travel, "can that card reimburse a hotel stay I may plan in a year?"
Another strategy a savvy credit card user might have is to plan to reevaluate the credit card within the first month that the renewal fee posts. Most credit card companies will allow you to cancel the card immediately following the moment that the credit card renewal fee posts, and in some cases get that renewal annual fee refunded. So, I am effectively playing with "house money" if I stay on top of things. I may reach out to the credit card issuer and say something like "I was attracted to the card because of the generous sign-up bonus, but I haven't been traveling as much as other people so I don't know if this card is a great match for my lifestyle". At that point, the representative might offer something to entice me to keep the card. Or, I can close the card and typically get my annual fee back.
The important thing to remember is to stay on top of the renewal date! I like to set a calendar reminder a year after I open a card so I remember.